Economists’ Reaction To The Housing Numbers

Posted by Tom Lindmark on August 21st, 2009

Further to my post on existing home sales, here are some reactions from economists.

The housing market is back up and running and that is great news. … This was the fourth consecutive rise in demand, the first time we have seen that in five years. Prices remain weak and that may be a bit misleading. If foreclosures grow as a proportion of sales, we would see the national numbers go down. But that doesn’t necessarily mean prices everywhere are declining. Indeed, what we are discovering in the more detailed price data is a rising number of metropolitan areas where prices are stabilizing or even slowly increasing. Nevertheless, don’t expect prices to start jumping. … People who had wanted to sell but in the past didn’t think they could, have begun to believe they can unload their homes. As a consequence, the inventory is rising and that should keep prices under pressure. – Joel Naroff, Naroff Economic Advisors

The housing sector has historically helped lead an economy out of recession; after all, lower interest rates are aimed more or less directly at consumption in the sector. What is problematic this time is the aforementioned modest increase occurs despite mortgage rates having collapsed to extraordinarily low levels. With rates unlikely to return to the levels seen in the spring, any further improvement in housing demand will have to come in conjunction with, relatively speaking, higher mortgage rates. – Dan Greenhaus, Miller Tabak

Sales had been steadily edging up from the January low of 4.49 million in recent months, but the latest increase looks more substantial, as it goes beyond simply reversing the drop in sales that occurred in the fourth quarter of last year. Some of the reasons why sales are rising include better affordability, a stabilizing economy, and the perhaps $8,000 first-time homebuyer tax credit. Affordability and economic improvement should continue to support sales in coming quarters. The homebuyer tax credit will not be valid for homes whose sale closes after November 30, 2009, and the National Association of Realtors has advised buyers to make a purchase by September so that there is enough time to get the sale to closing. There will undoubtedly be political pressure to extend the tax credit. – Abiel Reinhart, J.P. Morgan

There are three reasons not to get too carried away. First, sales are still 28% below their peak, so activity is still very subdued. Second, around 31% of sales are “forced” sales of foreclosed properties. Third, by holding at 9.4 the months’ supply of unsold homes remains above the level of around 7.5 that has historically been consistent with stable prices. In other words, the inventory overhang needs to be reduced significantly further before prices can start rising on a sustained basis. Overall, these figures may suggest that the recovery in housing activity is gathering pace, but there is a long way to go yet. – Paul Dales, Capital Economics

Sales have now rebounded 21% from the January low, though a substantial portion of the transaction continue to be distressed sales, keeping prices under pressure, and an ongoing flood of foreclosures has limited progress in getting inventories under control. … With foreclosures continuing to hit record highs, even with the surge in sales the number of homes available for sale at month end rose 7.3%, leaving months supply unchanged at 9.4, somewhat improved from levels of 11 months or higher seen much of last year but still way above more balanced levels near 6 months. – Ted Wieseman, Morgan Stanley

While inventories are well off their peaks, they are still very high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of eroding prices. (Not to mention the considerable amount of inventory that is still tied up in the legal process surrounding foreclosure and therefore is not counted as being for sale, and the large number of homes that have already been purchased out of foreclosure by speculators but that will eventually hit the market.) While price declines to date as reported by relevant measures like the S&P/Case-Shiller indices have been considerable, there is still a distance to travel before prices sink to levels necessary to balance supply and demand in the housing market. By our estimation, the national home price measure as calculated by S&P/Case-Shiller, which shows a cumulative 32% drop from the July 2006 peak, is roughly three-fourths of the way through its ultimate total decline in this cycle. – Joshua Shapiro, MFR Inc.